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FOREX opportunities for 2006 – Swedish Kroner to be biggest mover Back  
At the ‘Risk and Opportunities’ seminar given by Robert Sinche and Lawrence Goodman of Bank of America, Sinche and Goodman predict that the biggest currency mover will be the Swedish Kroner in 2006, in a year when changes in Japanese monetary policy will also have a significant impact.
Bank of America(BOA) hosted its ‘Risk and Opportunities in the 2006 Outlook Seminar’ at the Merrion hotel on December 9th 2005. The seminar was given by Robert Sinche, head of global FX strategy at BOA, and Lawrence Goodman head of emerging market strategy at BOA. The Seminars reviewed global markets and economies as they are today but more specifically focused on the future and what can be predicted for the global currency markets in 2006.

Robert Sinche focused on the main markets and overarching trends in the global economy. Sinche predicts that one of the major factors that will influence the global economy will come from Japan in 2006. The Bank of Japan (BOJ) will extract $200 billion worth of yen from the Japanese market and this will have far reaching consequences according to Sinche. This move by the BOJ is in the midst of a worldwide policy of the normalisation of monetary policy in central banks and so any change in Japanese inflation brought about by the extraction of the BOJ will prove to be highly significant. This lowering in the liquidity is expected in April 2006 and shift back from the quantity to interest rate targeting framework, with an overnight target at zero. He expects an overnight rate target to 0.25 per cent in September 2006. The yen is likely to strengthen as a result with the BOJ’s lifting of quantitative easing during the first half of 2006 and this will also have a structural upward pressure on Asian currencies.

Outside of Japan, Sinche predicts the main currency mover for 2006 to be the Swedish Krona. The Krona currently placed close to the bottom of world currency values is below its eight year average and is expected to rise from this low position. The repo rate in Sweden is also relatively low at .70 when its average since 1998 has been 1.79.

Sinche believes that the US dollar will decrease in the upcoming year. He puts this down to the overvaluation of the current US dollar. The US dollar has maintained this overvaluation because it has been supported by structural and cyclical factors. Sinche shows the similarities that there are between the dollar today and the dollar in the 1980s, the two appear to be operating in a similar cycle. The main factor that will affect the US dollar will be the repatriation of retained foreign earnings, Sinche predicts. The American Jobs Creation Act of 2004 provides a temporary tax deduction(85 per cent) for the repatriation of permanently reinvested foreign earnings (PREs). He estimates that about $300-350bn of PRE’s will be repatriated and will account for 10p.c. of the current account deficit will result from the demand created by the non-cyclical repatriation of permanently reinvested foreign earnings.

As far as Europe is concerned, the euro will be unable to adjust to sustained currency strength, but the Euro’s recent weakness suggests the worst impact was complete by mid-2005. As well as this , the ECB will be slow to tighten despite recent rhetoric as core inflation remains low. The Euro US dollar selling due to repatriation reflows will weigh on the euro until late 2005, but will fall to nearly zero in early 2006. And the burden of adjustment should be shifting from the euro to Asian currencies in 2006 and beyond.

The recent GBP sell-off has pushed the TWI slightly below its 7-year average, and cyclical weakness suggests continued modest downside risk. The UK will see a weakening housing cycle in 2005-06 suggests eventual easing by the Bank of England and the little additional easing is discounted into mid-2006, but 25-50bp additional easing appears more likely. She says, the GBP is unlikely to stabilise near current levels versus the Euro, but appears competitive in the 69-.72 range. GBP/US dollar is projected to remain near 1.75 into mid-2006.

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